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Monetta, Inc, has no debt, but is considering borrowing for…

Monetta, Inc, has no debt, but is considering borrowing for the first time to finance a three-year project. The company currently has an unlevered cost of capital of 12 percent and a 30 percent tax rate. The project requires an initial investment of $2.1 million, which will be straight-line depreciated over the three-year project life. The project, which is as risky as the firm’s current projects, is expected to generate earnings before depreciation of $1,050,000 per year for the three years. The capital for the initial investment will be raised with a loan for the full amount. The loan’s interest rate is 9 percent (which is also the current risk-free rate) and the principal will be repaid in one balloon payment at the end of the third year. What is the APV of the loan?

Janice purchased 300 shares of a company whose capital struc…

Janice purchased 300 shares of a company whose capital structure is 25 percent debt. The company announced that it will sell new shares of stock to pay off all of its debt (that is, become unlevered). The value of the shares is $35 per share before and after the restructuring. How can Janice use homemade leverage to replicate the company’s old capital structure? Ignore taxes in your analysis.

ABC Co. has a debt-equity ratio of 0.25, which will stay the…

ABC Co. has a debt-equity ratio of 0.25, which will stay the same forever. Their cost of debt is 5 percent per year, which means their annual interest payment is $1.00 million each year forever. The firm’s unlevered cost of capital is 10 percent and their tax rate is 20 percent. The firm’s assets will generate an annual EBIT of $12.00 million in perpetuity. Depreciation, agency costs, and bankruptcy costs are all zero in perpetuity. What is the value of the company’s equity? (Hint: use the Flow-to-Equity approach)